Baltimore Sun: The Scandal of Ground Rent Evictions Click HERE to Bring Up Full Post

From the Baltimore Sun, December 10, 2006:

Baltimore's arcane system of ground rents, widely viewed as a harmless vestige of colonial law, is increasingly being used by some investors to seize homes or extract large fees from people who often are ignorant of the loosely regulated process, an investigation by The Sun has found.

Tens of thousands of Baltimore homeowners must pay rent twice a year on the land under their houses. If they fall behind on the payments, the ground rent holders can sue to seize the houses-- and have done so nearly 4,000 times in the past six years, sometimes over back rent as little as $24, The Sun found.

...

"If you don't pay, you are putting your property at risk," said Lawrence Polakoff, a Baltimore Realtor whose family has filed more than 100 ejectment lawsuits since the start of 2000. "A ground rent owner isn't going to just sit back and say, 'I'm sorry someone's died,' and forget about it."

...

Three years ago, after a Towson lawyer complained about an ejectment suit filed against a 93-year-old client, the General Assembly capped a ground rent holder's attorneys' fees for preparing and filing an ejectment lawsuit at $700. But the law also allows ground rent holders to charge the property owner $300 for searching property titles, and pass on all other costs of collecting the debt -- copying, process servers, lawsuit filing fees -- plus up to $500 in costs of recovering back rent for periods before the lawsuit was filed.

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"For $84, your house can be taken," McGill said after court. "I'm a mortgage broker. Half my clients don't know how to contact their ground rent owners. This is going to take place all day long in Baltimore City, and it does."

...

"Even if you're billing at $200 [an hour], that's three hours, and there's no way it takes that long," she said, referring to the cap of $700 for "reasonable" legal costs. " ... Even if you sent your paralegal to Calvert Street by camel, it's not going to take that long."

...

Kim McGavin is an attorney who has advocated ground rent legal reform since a 93-year-old client in a nursing home was sued in an ejectment proceeding.

She and other critics contend that the largest holders tend to do all their legal and title-search work in-house, and can do much of it by computer, making their actual costs minimal.

"Even if you're billing at $200 [an hour], that's three hours, and there's no way it takes that long," she said, referring to the cap of $700 for "reasonable" legal costs. " ... Even if you sent your paralegal to Calvert Street by camel, it's not going to take that long."

Ground rents are great.

You buy a ground rent and get a return of at least 6%; a ninety-dollar annual ground rent redeems/is sold for $1500.00.

If your ground rent "tenant" (i.e. owner in fee simple, subject to a possible mortgage and to your ground rent) fails to pay on time, you get to tack on about $1500.00 in fees, which you can largely keep in house.

If the tenant does not pay everything, you take her house.

Suggested Reforms:

Allowing 18% interest on defaults in lieu of immediate ground rent eviction proceedings, replete with lien. 18% is what the City of Baltimore charges on back taxes. Not allowing ground rent lessors to evict until three payments are in default (typically 18 months, with payments due biennially.)

Creating a statutory ground-rent trust at every Circuit Court where "tenants" or their mortgage lenders whose ground rent lessors' identities are obscure may pay the required ground rent, with credit and immunity against any future eviction. Then make it a requirement that every ground rent eviction first provide notice to this trustee 60 days before ground rent eviction proceedings commence, with request for reconciliation of accounts.

Capping the "windfall" to the ground rent holders to actual costs, the redemption value, all unpaid rent and $1,000, so the windfall economic incentive remains but the over-the-top excess unjust enrichment goes back to the tenant who put the equity into the house in the first place. In a mortgage foreclosure, the bank has to pay the excess equity after costs and debts from a mortgage foreclosure sale to the owner; the ground rent holder should not be so grossly enriched for a trifle investment at no risk.

Requiring all ground rent holders to register with the trustee noted above and, for those who don't register or are otherwise unknown, allowing ground rent tenants to redeem the ground rent by payment to the trustee at settlement.

Most extremely, terminating ground rents upon a date certain by statute, with full redemption compensation to the owner protected by a lien with interest. This last one involves constitutional "takings" issues but I think the lien would constitute "full compensation." The good thing about this approach is that ground rents have a statutory redemption price already, so the issue of speculative value or appraisal that often presents itself in takings cases is mercifully removed.

The ground rent system serve little functional purpose, other than to provide an aleatory opportunity for speculators. When property values were lower and mortgage capital less plentiful, one could argue that the ground rent system lowered the effective purchase price of houses, allowing home ownership subject to ground rent to a larger segment of the population with modest capital access. Now, the actual ground rents are an economic trifle, perhaps 1/20 or 1/100 of the 2006 value of the property; a typical ground rent is $90/year, $1,500 redemption. Back then, the ground rent may easily have been 20% of the property value; the ground rents date back centuries, with 99-year leases infinitely renewable.

The real payoff of ground rent is not from the payment, but from the chance of a screw-up in the payment. Ground rents can be said to be against public policy, in that the creditor claims to "want" payment, but in reality wants default, because 6% means nothing compared to a 100-150% return in garbage legal fees or 4-5,000% return for a seizure of, say, a $70,000 house near Lake Montbello off of a $1,500 investment. This is a form of usury that, unlike credit card interest, is not associated with the meaningful introduction of new capital into the market. Not surprisingly, a large number of ground rent investment shops companies are either attorney-owned or are de facto partnerships with law firms, who collect the massive fees.

It would be excellent for the new Governor to show leadership on this issue by scaling back the windfall excesses of this system or moving towards its abolition (consistent with the principle of property rights and full restitution of investor capital.)